FY13 economic growth to be decade’s lowest at 5%

CSO estimate leaves govt, industry stunned, limits PC’s options

India’s economic growth is projected to slow to 5 per cent this year, the lowest in a decade, affording finance minister P Chidambaram little room for making the coming budget populist.

Instead, he may anno­u­nce tough steps to contain deficits and boost reforms, aiding growth. Advance estimates, customarily released by the Central Statistical Organisation (CSO) ahead of the budget, projected growth at 5 per cent, lower than the RBI estimated 5.5 per cent.

Chidambaram’s projection is 5.7 per cent and that of the prime minister’s economic advisory council clo­se to 6 per cent. In 2011-12 the economy grew at 6.2 per cent. On Monday the International Monetary Fu­n­d lowered India’s growth projection to 5.4 per cent for this financial year.

The government had projected 7–7.5 per cent growth in the budget presented last February. The CSO data, which show a lower than 5.4 per cent growth in the first half, has dashed hopes of a slow recovery in the second half.

“The CSO estimate no doubt is below what we expected it to be. We are keeping a watch… and have taken and will continue to take appropriate measures to revive grow­th,” a finance ministry stat­e­ment said, hinting that the budget may contain reforms to boost investment and growth.

The chairman of the prime minister’s economic advisory council, C Rangarajan, too was disappointed with the growth data. “My own estimate is when the full year’s data become available, it can be revised upward,” he said. He gave no reason for the optimism.

The finance ministry too expected the final numbers to be better, as indicators have shown an uptrend since November.

The lower CSO estimate is mainly due to the poor showing of the manufacturing, agriculture and services sectors that are the backbone of the economy.

The CSO saw a lower growth of 1.8 per cent in agriculture this year; last year the growth here was 3.6 per cent. Likewise, manufacturing is expected to grow by 1.9 per cent against 2.7 per cent last year.

“The reduction in growth in agriculture and allied sectors has been on account of lower-than-normal rain, particularly in June-July. In industry, growth has been lower mainly on account of lower growth in manufacturing,” a finance ministry statement said.

Growth in the service sector, accounting for 56 per cent of India’s GDP, is forecast to slow down to 6.6 per cent from 8.2 per cent earlier.

“These all look a little low to us, but it is the services sector estimate, where high-frequency information is most lacking, which is the biggest surprise,” Credit Suisse analyst Robert Prior-Wandesforde said.

Crisil said a weakness in domestic demand along with a fragile global economic scenario resulted in the slow growth of the services sector. The growth is the slowest growth since 2000-01.

CSO data suggest that inventory build-up has increased in the economy due to sluggish domestic consumption and export demand. An improvement in demand in the next financial year will help cut the build-up and increase capacity use. But private investments need to be pumped up to raise and sustain growth beyond 2013-14.

Faced with the difficult task of reining in the burgeoning fiscal deficit that has imperiled India’s investment-grade credit rating, the government will have a tough time to boost spending to prop up growth ahead of the general elections in 2014.

Chidambaram is believed to have already resorted to a 20 per cent cut in plan expenditure and saved Rs 20,000 crore in defence spending. This along with a Rs 30,000 crore mop-up through disinvestment will help keep the fiscal deficit below 5.3 per cent. CSO suggests growth in government expenditure will moderate to 4 per cent this year from 8.6 per cent last year.

Critics warn that at a time of low growth, lower spending is fraught with the risks of the slowdown deepening without helping the deficit ratio. Others argue that the government has little option but to tighten its belt.

Ficci president Naina Lal Kidwai said though the slowdown was anticipated, the number was astonishingly low. Several overriding risks remained and it was important that steps were firmed up to give a thrust to growth.

“At a time when the global economic situation is uncertain and our exports are feeling the heat, we must take all possible measures to ramp up domestic demand so that our economic performance does not deteriorate. This is critical as overall growth has a direct bearing on employment generation and if the downward spiral in growth is not arrested quickly, we could see the employment situation turning bleak. Alongside further reforms by the government, we also need to see RBI focus more and more now on pushing growth.” she said.

In IMF’s forecast too, the drop in growth projections was larger than anticipated, Kidwai said, adding that this underlined the gravity of the situation and called for policy action in a focused manner.

“We are losing out on our position of being among the fastest growing economies in the world and this will play on the minds of global investors unless some swift action is taken by the government,” she said.

RBI in an assessment last month said structural bottlenecks had restricted the growth potential to around 7 per cent, ruining the aspirations for a near double-digit expansion needed to generate jobs.

Roads, power and mining projects worth billions of dollars had been held up for years because of delays in multiple regulatory clearances. Due to the poor investor sentiment, public sector undertakings have not invested adequately in the past couple of years and were now sitting on a cash pile of over Rs 6,00,000 crore.

The private sector too must be sitting on more cash than this and is instead making huge dividend payouts, depleting corporate savings. The savings rate was expected to fall below 25 per cent of GDP, impacting investments.

RBI last month cut interest rates for the first time in nine months, but warned that while halting the slide in economic growth was a priority, there was limited room for further easing of rates unless inflation was tamed and high current account deficit narrowed.